May 02, 2013

College Freakonomics

Shortly after our lively conversation around the many college-related decisions we face, I ran into a series of posts (I heard the podcasts first, then tracked down the posts) from the Freakonomics guys. If you're not familiar with them, they are economists who look at interesting questions from a fresh and (supposedly) unbiased point-of-view to try and ascertain the truth of any given situation.

They have addressed many interesting issues related to college over the past few years, so I thought I'd share some of the posts and highlight a few things I felt were worth sharing.

The first piece asks if college still matters (BTW, they have a unique take on the new healthcare plan as part of this post as well) Their response:

Of all the topics that economists have studied, I would say one we are most certain about are the returns to education. And the numbers that people have come up with over and over are that every extra year of education that you get will translate into an 8 percent increase in earnings over your lifetime. So someone who graduated from college will earn about 30 percent more on average than someone who only graduated from high school. And if anything, the returns to education have gotten larger over time. They’re as big as they have ever been.

Wow. Of all things they study, the value of education is the one they're most certain of? That's quite a compelling statement. And that's the first time I've ever seen a return on college quantified -- that each year results in about an 8% lifetime earnings increase.

Given the crappy economy, a college degree is more valuable than ever. The most telling statistic as to the value of college: the unemployment rate among college graduates is less than half (4.5%) than people with only a high school diploma (9.7%).

According to the College Board, a year of tuition at a public college for an in-state student costs an average of $7,605, while a year at a private college costs an average of $27,293. Meaning that (assuming you graduate in four years) a college diploma from a public school costs about $30,000, and about $109,000 from a private school. That’s a lot of coin, but consider this: the difference in yearly income for a person with a college degree and a person with just a high school diploma is $19,550, according to the 2010 Census. So keeping things simple, on average, a public school college degree pays for itself in less than two years, and a private school diploma in less than six. Which is probably why, according to the Pew study, the vast majority of college graduates (86%) say that college was a good investment for them.

I think that people often make the mistake of not thinking through the problem as systematically and thoroughly as an economist would advise. So first of all, there are two major costs of college. Everybody thinks about tuition. But there is another equally important cost, and that’s the opportunity cost of not working. So when you go to college you’re going to forgo working a job that’s going to pay you some kind of salary. And while lots of students have part-time jobs, or try to fit some kind of work in while they’re in college, they’re obviously not doing the kind of work that they would be doing if they didn’t go to college.

That said, the returns to education are, in a word, huge. College graduates earn more money, live longer, and are healthier and happier than similar people who don’t graduate from college.

There is a lot that I'm leaving out (due to space) in their podcasts, the posts above that I've linked to, and the links within their posts that give more detail. But let me summarize their views, which are similar to my conclusions on this matter:

ON AVERAGE, a college education is a great financial investment, allowing the graduate to earn much more than he/she would without it.

That said, there are a whole lot of issues that may make it not a great deal. These include: the student doesn't have the ability or desire to attend college, the student completes some college but doesn't graduate, and the student pays too much for college in relation to what he'll earn after school.

So while going to college on average is a good move, none of us individually are the exact average. That's why each college/no-college decision needs to be made in light of the specific situation a particular student is facing.

If you want to be sure you get the most economic benefit from college, go to the most affordable school that gets your career started where you want it to be started. From there on, your work experience (for the most part) will determine your level of success.

So what does this mean for my kids? I have no idea at this point. They are both in high school and the next two years will determine a lot -- will they go to college, if so where, what do they want to study, and so forth. Our family is working through this issue but it will be some time before we get to the end of the road.

I'm guessing there will be many comments on this issue and that's great. I just wanted to introduce some new material and get the conversation rolling.

Comments

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Yes, on average I think college greatly increases lifetime income. On average you need college to succeed in just about any career. On average, college matters more than ever.

I think a lot of people mix up the argument between the value of college to the individual getting the job versus to performance on the job. College SHOULD not cost so much. Many jobs SHOULD not require college, but with the majority of people going to college, a degree becomes an easy marker for seriousness and perseverance, so its often required. Its crazy college has become so expensive and such a necessity for so many jobs, but it seems to have.

If I want to become a electrician and a one time license cost jumps to $50K, that doesn't mean I shouldn't get the license, that just means its more difficult and the payoff is less than it used to be.

I think the degree you obtain is a very important part of making college worth the cost. For example, a graduate with an engineering degree should be able to find a $55k+ job without too much trouble, but someone with a liberal arts degree will have a much more difficult time finding a job, much less one that will pay as much as an engineering job.

In my family, college has made all the difference. My parents were children of immigrants...my mother never attended college. my father's father was a gardener who died when my Dad was a little kid, while my father's mother hardly spoke English and made ends meet with a 1 acre strawberry patch and working as a motel maid.my Dad was never thinking about college, but he was in Korea and had the opportunity to go because of the Gi bill, but he only went to college because a job on a fishing boat fell through. Amazing how random his decision was! He ended up being good at school and got his MBA, then went into a successful management career in the manufacturing business. My parents raised 4 kids although we were not well off, and stressed education. although my mom didnt think college was necessary for us girls but my father did. All of us 4 kids (now we are all in our 50's) have post grad degrees and good careers based on our educations, we have all been fortunate to enjoy upper middle class and comfortable lives. It is something to consider because things would have been very different if my Dad had gotten on that boat instead of going to college!

I live in a part of the country now where some of the same immigrant stock as my family settled....there are still families here who think it is dumb for all boys to finish high school, and college is still considered optional by many and even elitist or irreligious by some. And these families are dirt poor. It's sobering to think that's how me and my siblings might have ended up.

I wish colleges would tell you some future earnings potential numbers for different majors rather than leaving that up to the student to find out (often the hard way). But I guess they want people in their lower salary majors too... In the same way FMF advocates doing a job you like which pays more, rather than a job you love which pays less, I think you should major in a field which you like and pays more.

I think where you live also plays a part. In the most educated areas of the country, Silicon Valley and DC, it's even harder to get by without a degree, because EVERYONE has one. So if I'm hiring someone and considering 2 candidates which are roughly even, I'll probably take the one with the degree... even though the job may not require it.

Then since EVERYONE has one, a graduate degree is a way to stand out. It's an arms race. So while the jobs may not require the degree, its hard to beat out other candidates who are overeducated. So now EVERYONE has a graduate degree. "in Washington. Twenty-eight percent of the over-25 population here has a master’s or PhD — more than any state." (source below).

Also the stat FMF quoted of lower unemployment for degree holders is even lower for graduate degree holders. It never ends. You can keep up or be left behind.

To Apex's coming argument :) for every Bill Gates or Mark Zuckerburg, there's 100,000 low income drop-outs. Sure you can be successful without a degree. But besides being a diamond in the rough you need a lot of luck also.

I think college is so unique to the individual, it's really tough to put out generalizations about whether it's a good decision. So I applaud your cautious use of "average."

My paternal grandfather graduated from William and Mary and was a teacher and principal all his life, though my paternal grandmother did not go to college. Most of my father's family were farmers, and most of them still do that today. I would consider them ignorant (very racist and bigoted), but they make a small living and are proud of their lifestyle.

My maternal grandmother had a nursing degree, but my maternal grandfather did not go to college and just barely passed high school (thanks to his football skills). However, my grandfather was extremely mechanical and a fantastic salesman. With his brother and father, they put together a coal mining equipment company, and were millionaires in the 70s and early 80s. (You know that circular machine used at horse events to cool down horses after racing and performances; you hook the horse harness to it and it slowly walks them? Yeah, they invented that, but sold it to someone very early and got little money for it.) None of them had any form of higher education, but they were really mechanically brilliant and my grandfather could sell an icemaker to eskimos, as the saying goes. College would never have been right for any of them, but they still made a great living. (All that money is gone, of course, squandered in affairs and divorces.)

It really depends on the individual skill set. My paternal grandfather was brilliant and made use of his brains in education. My maternal grandfather was dumb as a post, but with his people skills and his good hands, along with those of his smarter father and brother, he still made a great living. But he had the drive and the support. Without my grandmother doing the books, the business would never have been successful, as they had very poor math skills.

But if college is not your path, you have got to be motivated. You can be successful with vocational training or running your own business, but you have got to work your ass off. (Not that college grads don't work hard.) I think with a lot of younger people today, this is a huge issue. This is a generalization, of course, but many of my peers (I'm 26) are lazy and entitled. And the younger generations get even worse, every year (my mother teaches, and they get progressively more immature and lazy as each year passes). You don't need college to be successful and wealthy. But you must have the drive and gumption to make things work.

I think one added benefit of college is making you more versatile if you would need to change jobs. You learn how to learn things quickly and that helps you adapt to different professions. Employability vs employment.

But fully agree about the choice of major. My kids are not yet in school, but we've already had some conversations with my husband how we would rather see them with a STEM major or something giving practical skills rather than liberal arts, philosophy or something of that nature. But we'll see how the job market will look like in 15 years, things change so quickly.

Choose your major carefully, look at return on investment as well as your interests and abilities. Take whatever information your school gives you in regards to future employment with a grain of salt. They are selling expensive educations, no returns or refunds if it doesn't work for you. So, go for a test drive before you buy it. Working in your chosen field of study well before graduating will give most students a realistic view of their career prospects.

@Mc
My wife and I are first generation immigrants from England and arrived in 1958, after a 2 year stay in Canada. My grandfather served in WW1 and was a store clerk. My father was a fireman. In England I served a 5 year apprenticeship with one of the oldest aircraft companies and graduated with Higher National certificates in mechanical and aeronautical engineering and was the first person ever in my family to get a degree, and later an MS in engineering at the oldest university in California. I worked for 36 years in the aerospace industry and learned skills that carried over in our retirement to managing our investments with great success.

I am 78 and my wife is 80 and we have had, and are still having, a fantastic life, none of which would have been possible without higher education. The people I see in America that are facing hard times are those that are stuck in minimum wage jobs without the prospect of raises, promotions, bonuses and retirement pensions. In California the Hispanic and Black populations are the hardest hit and unfortunately the areas where they predominate are the ones with the highest crime rates and school dropout rates.

Wish we had that kind of in-state tuition rates. At the state university just down the road from us, tuition and lab fees are $13,000 per year, and I'm in the south in a relatively low cost of living area.

You are confused about any perspective I might have if you think I would argue that Bill Gates or Mark Zuckerberg are representative of anything. It's extremely dangerous to draw any conclusions from outliers.

Both of them went to college and at prestigious schools. Bill Gates is just a few credits short of a degree. They struck lightning in a bottle at the right time and that's what made their dropping out work for them. They aren't representative of anything useful at all.

My perspective is in line with the highlighting of the word AVERAGE by FMF. Averages are also a dangerous way to make an assessment. This could be compared to individual stocks versus mutual funds. If the S&P is up 10% then most mutual funds that have a good diversification in US stocks will be up a decent amount. Therefore anyone investing in stocks should be doing very well right? Not if they only bought 1 stock and bought the wrong one. People going to college are not a mutual fund that gets the diversified average. They are an individual stock. They stand on their own. And their performance may vary greatly from the average.

If college increases your earnings 30% on average that means for some people it is going to increase it 500% and for some people it is going to increase it 0% with 4 years of lost earnings and 4 years of debt. It's important to determine which end of the spectrum you as a student fall on. If you are the marginal student who is closer to the 0% return end of the spectrum then the numbers for averages are useless to you.

I would hope most people can see that this is a truism. If the average is a 30% gain and some people are getting a 50%, 100% or 500% (a small few) gain, then there have to be people getting 20%, 10%, and probably 0% gains to average that out. The distribution curve is broad not narrow. If you are in the left tail of that curve, you have made a mistake by going to college. And the more people who go, the larger that left tail will get.

Based on my previous comments some people might think I think college is a big waste and people shouldn't go. That is not true. College was very beneficial for me. I suspect my kids with both go to college.

So let me state very clearly so no one mis-understands: I THINK FOR MOST PEOPLE WHO GO TO COLLEGE THAT THE DEGREE IS A BIG BENEFIT TO THEM.

What I oppose is this evangelizing for college by politicians, colleges, school administrators, parents, the media, and people like freakonomics by focusing on the averages and promoting the idea that everyone who goes will benefit. This is a lie.

Choice of major will be another large determining factor in where one falls on the spectrum of benefit. But the evangelizers rarely talk about that. College is promoted in the abstract as if that piece of paper is a golden ticket regardless of what was studied to get it. That is also a lie.

These lies only encourages more people on the margins to attend. The exact type of person who is least likely to benefit from college. The average person will benefit. Most people will benefit. But a not insignificant minority will not benefit and be financially hurt by it.

I don't know exactly how big that percentage is, but I know it's real. When you consider that 15% of postal delivery carriers have a bachelors degree and 25% of retail sales clerks have a bachelors degree you realize there are a lot of real people with degrees that didn't translate into a better job for them. For those who find out after the fact, they should be asking, why did everyone let me believe this was a no lose situation when it wasn't true?

I personally know many immigrant college graduates and others getting an education and this is tremendously improving their ability to get good paying and secure jobs.

I direct a program at our Univ that offers counseling for disadvantaged students to persevere and finish their bachelors' degrees and then to go to professional schools in the health care field. After doing this for over a decade, I have become convinced that it is still very possible in America to work hard at your education and in this way significantly improve your economic prospects. No matter how poor and uneducated they are to begin with, they can really improve their future by getting more education (at least education in STEM and professional programs).

@Paul
Bill Gates actually dropped out of Harvard and never earned a college degree.
He has a most interesting background and is unquestionably one of the smartest men alive, and also one of the wealthiest. He actually owes his father a great deal. When IBM developed the first PC they started looking for an operating system for it. Bill Gates knew of the existence of an operating system called CP/M that would be a good place to start and his father, a wealthy attorney, loaned him the money to be able to buy the rights to it from a very small California company called Digital Research. Bill bought it for about $100K and with the help of some of his friends turned it into MS-DOS which later became the operating system that IBM selected. Two of the other wealthiest people in the USA that never received college degrees were Jobs and Wozniak, developers of the first Apple computer.

Later in life these great men received a boatlod of honorary degrees for their great contributions to the world of computing.

@Apex fair point. I wasn't actually predicting your response, I've just read you to be a strong advocate of "college isn't for everyone," which I agree with specifically, but not generally -- as do you. However I think its a dangerous message to propagate, as it gets generalized.

btw, I believe Gates was only a sophomore and was not on a degree track, so he wasn't that close to earning a degree

@Old Limey, Gates lived in one of the most exclusive areas of Seattle and attended an even more exclusive private school - one of the few in the U.S. with a computer! Many universities did not yet have one. While he was certainly exceptional, including a near-perfect on his SAT, he may have led a different life without his background of wealth and privilege. So yes, he owes a lot to his father.

sources: Hard Drive: Bill Gates and the Making of the Microsoft Empire

That's great! It's exactly like I thought. On average, it's much better to have a college degree even if you have to go into debt to get it. It will pay off over many years of working.
Sure, if you are exceptional, you can go your own way like Bill Gates and Steve Jobs. They are one in millions though. We don't hear about the millions that didn't become billionaires.

Really interesting. The difference between tuition for a public school and a private school makes me wonder why anyone would choose a private school at all. I attended a public school and I work with people who graduated from some of the most prestigious business schools in the country. Those people are not any better at their job than I am.

Very interesting. The big question, for me, is how much to save per child in a 529 plan. We are 100% committed to paying for college, but there are so many unknowns, like what if he doesn't want to college, or gets a scholarship, or what if he gets into Harvard? This discussion makes me think the optimal amount to save is the cost of tuition at a state school for 4 years, and if he gets in to an ivy, we cross that bridge when we get there.

It is not the college that matters, it is the person. Rather than concluding that those with college degrees make more, and live linger, etc, I think those people who make their lives better are driven, and driven people tend to go to college, because that is just what driven people do

The same traits that make someone go to college, also make them work hard, take care of themselves, etc.

It isn't the degree specifically (unless we are talking specific fields like law, medicine, etc), it's the drive of the individual. That drive sends them to college.

And I am a firm believer that if you take a young person with that drive, have them forego college and instead go to into the trades, or start a small business, or apprentice or something, the difference in both opportuninty cost of income, plus the elimination of student loans, plus the jump start on experience and seniority puts them at an enormous advantage.

At age 23, the college kid has a degree, and $50K in student loan debt, no experience, and starts at the bottom of their field.

My above driven example does one of the options listed above, has no student loan debt, and save $100K in those 5 years from working, and has 5 years of experience.

I have plenty of college experience and degrees. While I enjoyed the time and experiences, the degrees themselves (MBA from top 10%) were a waste of money, as I have my own company. I couldn't care less about a degree. If you have it, that's great. What I care about is if you can make my company money, and do your job well.

There is a weak correlation between cost of living and in-state tuition rate. Likely what you are seeing is a reflection of your state's lower appropriation for higher education funding. Lower funding equals a heavier burden on enrollees to pay for the costs of the university.

BH if you get into an ivy and can't afford tuition then there is ample financial aid available at those schools. If your income is relatively high >$150k then you're going to be expected to pay more/all of the bill. If your kid gets a scholarship you can withdraw money from a 529 in an amount equal to the scholarship without penalty.

Troy's got it. There's confusion over cause/effect. I think it's more like individuals destined for success tend to go to college. And they go to college mainly because it's considered heresy to say "I'm not going to college" - you'll be told you're wasting your ability.

A college degree now is the high school diploma of 50 years ago - it just takes us until age 22 to get there. And therein lies the real problem - we're spending the first quarter or so of our lifetimes getting the basic education that should be completed by age 15 or so. Very inefficient. But it's politically incorrect to suggest changes to the education system - a very entrenched bureaucracy.

@Troy @Chuck It's true that correlation isn't causation, and I agree the two are tough to untangle here. Still, my intuition kicks in the opposite direction from yours. I'd be really hesitant to hire or work with an engineer who doesn't have a bachelor's degree. Not totally opposed, but it would take some knock-your-socks-off accomplishments to convince me.

If you take your college EE or CS program seriously, you will learn a lot about efficient and correct design. You'll also get the critical math in rigorous form. If you somehow apprentice into the workforce at 18 instead, I'd fear that you will learn exactly what's necessary to crank through your current job, with little grasp of the fundamentals. Sooner or later the world moves on to new technology, you don't have the core skills to adapt, and your career is a dead-end.

I don't know much about other engineering disciplines, but if anything I would expect the danger to be greater. With computers, a strong autodidact at least has a chance: there are great resources on the Internet to teach you how to build software, and there is huge demand even for low-skilled programming work. Not so true for airplanes or bridges.

I do think this is a change from 100 or even 50 years ago. The complexity of our machines is exploding exponentially. This comic strip says it better than I can:

Within my family, the generation now in school is the fifth generation to go to college. My parents, born in the 1920's both went, as did three of my grandparents, born before 1900. My great-grandfather and his sister (born in the 1860's) each earned advanced degrees, the former was an MD and the latter earned a PhD. It's impossible to say where we would be without the head start and advantages that generations of higher education have provided. Among my siblings and cousins who opted out of college, the advantages from their parents' own higher education is still apparent. Thus, to talk about how far a fellow named Gates was able to go without earning his own degree, must include an understanding of the advantages he had over his lifetime because both of his parents graduated from college.

A significant factor in our success in life is luck. It is entirely random the family to which we we were born and that it coincided with both sufficient resources and political stability puts us at tremendous advantage, before the question of college even comes into play. There is only so much you can do to overcome or improve on your own circumstance, and college will probably help that. But there is a tremendous advantage you can give your children and your children's children. Getting yourself thru college pays dividends in successive generations.

They're right and wrong. A bachelor's degree is worth less compared to what it used to be, but a high school diploma is worth WAY less, so the gaps has widened. This is nothing to celebrate. What it means is that tons of decent-paying jobs that used to require a high school diploma now require a 2 or 4 years degree for no reason except education inflation.